how to find free money in the market

There’s nothing like finding a great deal on an asset. Some have compared it to bargain

shopping at a mall, but it’s not quite the same. You see, finding a cheap price on a shirt, a TV, an appliance, or a car is nice, especially if it is something you needed to buy anyway. But those things don’t gain in value. You buy them at one price and then they depreciate as you use them.

But an asset? Well, that’s different. You find an asset for an incredible deal, and it’s like purchasing free money. Pick up a stock that’s been pushed down to extremely low levels, and over time you’re rewarded as the value of your holding goes up.

Now, if you bought that pair of pants or a gas grill and they appreciated in value over time, how excited would you be to go shopping? That’s exactly why I like to peruse the aisles of Wall Street every day, looking for distressed assets heaped in the sale bins.

Unlike stores, the sale bins on The Street aren’t very busy. There aren’t hordes of people picking them over them in a Black Friday frenzy. There should be, of course, but then again, I’m glad there isn’t — that would mean we arrived too late, since with stocks, the price rises as the demand heats up.

In looking for undervalued assets, we seek out things that aren’t popular at that moment. We’re buying winter coats in the heat of summer. That’s the timing we thrive on. Later, when everyone

wants a winter coat and they’re paying top dollar, we already have one on the cheap. If that coat is a stock, we can even sell it at that point for a tidy profit (and maybe even more than it’s worth, since you can usually count on the public to bid up a stock past its fair value on the upside swing).

I use this same strategy in most of my purchasing decisions. I bought my Lincoln Navigator when I thought gasoline prices were

topping out and about to head lower. At that point, SUVs were selling for a song. As you also may know from previous issues, I’m a collector of muscle cars — but I sold two as the stock market was peaking, because I knew that horrible sentiment in stocks would spill over into collectibles, including antique cars. When markets tank, among the first things to go

are the “toys for boys.” Besides, when I sold them, I knew that I could buy them back later, as the stock market tumble played out, at a much more favorable price.

Buying a winter coat in the summer was my analogy, but it’s not quite right. Figuring out the “off-season” for various consumer goods is easy, after all. With stocks, deciding what is undervalued can be more complicated. We have to know the true value of that asset. We need to be able to understand financial figures and — in our case — decipher emerging patterns on all manner of charts.

How We Find “Free Money” In the Stock Markets

Ultimate Wealth Report

Edited by Sean Hyman

A Publication of Newsmax and Moneynews

Vol. 2, No. 2 / February 2013

“ In looking for undervalued assets, we

seek out things that aren’t popular at that moment.

We’re buying winter coats in the heat of summer.”

2 UltimateWealthReport.com February 2013

Buying Undervalued Houses Saved Me from the Housing Downturn

A few months ago, I bought a house for $68 per square foot in a city that averages around $80 to $100 per square foot. I also sold my existing home (one I bought five years ago on the cheap) above my asking price. Why? The local real estate market was turning upward here in Texas.

Take a closer look at that scenario: I received top dollar for my existing home, and was still able to find a new one at a good bargain, because I found a builder who was hurting and needed to cut loose some inventory.

I’m not saying this to paint myself as some sort of real-estate guru. I’m not. What I am, though, is a careful consumer. What this shows is that, no matter what the trajectory of the market, there are things that are high priced and there often are bargains to be found, if you do your homework.

That describes the stock market in a nutshell. When prices tank, it doesn’t mean everything

is dropping all at once and at the same velocity. When markets are soaring, not everything shoots up at the same rate either. In fact, stocks that are more depressed, yet have unrecognized, underlying value, will tend to shoot up faster and get hotter than those around them.

Whether it’s muscle cars, homes or stocks, I look for assets that are undervalued. I sit with cash in hand and wait patiently for the right opportunities. This approach pays off.

In a manner of speaking, in Ultimate Wealth Report, we recently bought a whole continent for a steal and it has paid off. I’m referring to our purchase of the Italy iShares ETF (EWI).

We bought this undervalued asset in July of 2012. Now, others are beginning to realize what we did last summer. They’re buying too. Because of that, we’re being rewarded with so-called “free money” via appreciation of this ETF.

As a matter of fact, as I am writing this, we are up around 44 percent.

So let’s just say that you put $5,000 into this ETF. The ETF is now worth another $2,200 of “free money” through appreciation, for a total of $7,200. And we’ve seen this huge percentage return within a mere five months!

Such returns can’t be guaranteed every time. Still, it is a good example of the potential of our investing style. And in this month’s issue, I have some new undervalued stocks I am targeting. Yes, it’s time for some bargain shopping.

“Market Efficiency” Is a MythSome who study markets believe there is an

efficiency to how they behave. I’m not here to argue the various ins and outs of market theory, other than to say I don’t believe that it is truly efficient. More importantly, even if you do believe in efficiency of markets, there still would be periodic anomalies because of the human element.

You can always count on humans to get emotional and overreact in all types of situations, and buying and selling stocks is no exception. When that happens, bargains present themselves. You also can count on people to be overzealous and pay too much for an asset. Later on, they will be left holding the bag because of their impatience.

As a subscriber to Ultimate Wealth Report, you may have opted to get this newsletter with our Convenient Automatic Renewal program. If you decide not to cancel your subscription, your credit card will be billed each year and read NMX*UltimateWealthReport on your credit card statement. Thank you.

IMPORTANT

Sean Hyman’s extensive background in the financial markets goes back more than 20 years, including as a broker at Charles Schwab and as an instructor for Forex Capital Markets. He has held five financial licenses and has been a stock-broker, manager of a team of stockbro-kers, a trading course instructor in the

currency markets, a financial writer, and a key speaker at conferences both nationally and internationally. His invest-ing philosophy is based on choosing the assets that will get “inflated” in the future — commodities — and investing in fundamentally superior currencies that will benefit from the U.S. dollar’s decline. He does it in a way that’s simple and, via the use of exchange-traded funds, can be done through a standard brokerage account.

February 2013 Moneynews.com 3

Another tendency in markets also creates opportunities. When markets are robust, jobs are abundant and people are flush with cash. However, when markets decline, jobs tend to be cut back and cash is tight. Yet, most of the best bargains are to be found when markets are down, jobs are not abundant and cash is slim. Therefore, the only people who can usually snatch up these bargains are those who save counter to the economic/business cycle.

Recessions will come and recessions will go. It is the cycle of economies. Now, I cannot tell you exactly when the next recession is going to hit. But I can tell that I already am saving cash for it when it does come.

If you have cash in the heart of a recession, you look like a genius, and therefore you get opportunities presented to you that almost no one else gets.

Life has a way of rewarding the prepared and punishing the ill-prepared. Not that it should be taken as a put-down, since I’ve been on both sides of that equation. But it’s a life lesson. And I hope you take the opportunity now — if you haven’t already — to start managing your cash in this way.

Having cash is a boon right now, because we have bargains in our midst. The first one is hiding in plain sight — well, it’s hard to hide when you’re a country of 1.3 billion people and one of the most important economies in the world.

Recently, I was on CNBC Asia talking about China. You could sense the pessimism about the country from the commentators. They just could not seem to buy the fact that China is turning around.

However, the economic turnaround for China is showing up in technical readings on various charts, in commodity prices, and in the monthly economic data. Instead of considering all of that, though, the media types are relying on quarterly gross-domestic product data, waiting for that to pick up. What they’re not taking into account is that GDP data is not real-time info, but reflective

of a few months back.The first indications for me that China is ready

for a turnaround were movements in broadly used commodities, such as steel and copper and the wide-ranging CRB Commodity Index. Take a look at Chart 1, which shows these three measures.

Steel, copper and the CRB Commodity Index halted their downward decline in June (shown by the horizontal lines in the chart) and began to base

sideways. This showed me that there is renewed demand in steel, copper and other widely used commodities. And who uses these commodities more than anyone else? China!

When I saw this stabilization, I began to dig deeper, this time to the Shanghai Composite Index weekly three-year chart (Chart 2). There, I saw a divergence happening that began in December when the index was hitting its 52-week low.

This positive divergence in the RSI indicator meant that Chinese stocks were forming a bottom. Next, I charted Chinese Industrial Production, which had been in decline since the start of 2010.

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In this chart of steel, copper and the CRB Commodity Index, we can see commodities bottomed in June, and then began to base sideways, showing renewed demand. Knowing China uses more commodities than anyone, this is a bullish sign for China’s economy.

SOURCE: StockCharts.com

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Steel, Copper and the CRB Index, One Year


However, something happened in the last three months of 2012 — industrial production numbers picked up three months in a row. In fact, the December reading broke the downtrend line that had been in place for three years, another promising sign that China is turning the corner.

Continuing my investigation, I noticed that since May 2012, China has steadily increased its M2 money supply, a sign that the government was trying to install a floor under the economy.

Another sign of life? The HSBC Flash Manufacturing PMI data came back above the boom/bust level for two months in a row, in November and December. Manufacturing was beginning to expand again.

If all that’s not enough, consider this: China is growing at 7.4 percent a year. Contrast that to 0.6 percent for the eurozone and 2.6 percent for the United States. In addition, China has an unemployment rate of 4.1 percent, lower than Europe (11.7 percent) and the United States (7.7 percent). Yet, plenty of investors are showing little interest in China. Amazing, huh? I think so.

The chart technicals, the improving monthly

economic data and the stabilization of major commodities that China uses, coupled with negative sentiment that usually keeps prices at bay, all led me toward investments that track the Chinese stock market.

One of the most common Chinese ETFs, the iShares FTSE China 25 Index Fund (symbol FXI on the NYSE), tracks the 25 largest companies in China that are available to foreigners for investment. It holds stocks such as China Mobile, China Construction Bank, CNOOC, PetroChina, etc. — huge companies that are well known names here in America.

Here is why I like it from a fundamental standpoint: FXI has a P/E of 9. The S&P 500’s P/E, for comparison, is at 15.77 as of this writing.

Remember, China’s economy is growing much faster than the United States’, and with almost half the unemployment rate. And China is not

drowning in debt. In other words, the iShares FTSE China ETF is

trading much cheaper than U.S. stocks, in a better economy. If anything, Chinese stocks could end up commanding a higher price relative to earnings than U.S. stocks because of China’s growth, low unemployment and lack of burdensome debt.

However, it is not just the P/E of FXI that I like. It also pays a nice dividend yield of 2.49 percent. (By way of comparison, the S&P 500 Index fund, symbol SPY, pays 2.01 percent.) The average price-to-book ratio of stocks within FXI is a respectable 1.32, whereas SPY’s ratio is at 2.03.

The FTSE China 25 Index Fund is cheap relative to its earnings and to its assets, and is also cheap relative to U.S. stock markets. In addition, sentiment on China is still bad, meaning there’s value to be had — the masses aren’t feverishly pulling it out of the sale bin quite yet.

Those are all good things, but I like the ETF from a technical chart perspective, too. Take a look at Chart 3, where you’ll notice that FXI is performing better than the overall Shanghai Composite Index. That’s because it’s an ETF

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A positive divergence in the RSI indicator meant that Chinese stocks were forming a bottom. Since then, the index has made a “higher high,” another key technical point of consideration.

SOURCE: StockCharts.com

Shanghai Composite Index330032003100300029002800270026002500

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focused on some of China’s top stocks and not all of them across the board. Money will flow into these top stocks before the second-tier picks included in the Shanghai Composite.

The Safer Way to Buy Chinese StocksThere is no doubt that Chinese stocks go

through periods of booms and busts. That is common among emerging markets, as China still is. Therefore, the key to safely entering them is to catch them when it is near a sustainable trend line rather than when these stocks are climbing too steeply.

You can see from Chart 3 that Chinese stocks have had times when they went parabolic and then busted. Steep trends like that are unsustainable. But you also will see that there is a healthy uptrend line that has been in effect for eight years that is sustainable. The key is to catch these “wild rides” near the green, long-term uptrend line as it’s ready to turn higher. I believe that is where FXI is on the chart right now.

I’ve put a box around the area on the volume where we experienced the “point of maximum pessimism.” This is where the new floor was

established in Chinese stocks. Since then, the ETF has come very close to its long-term uptrend line twice, but has now broken the recent downward consolidation (which I show with the straight downward line on the right side of the chart).

That tells me that the $30 to $32 per share area is likely the new higher floor within this uptrend, and thus its downside is very limited. But, I believe it will reach the $60 area over the next 12 to 18 months, because that price level would only equate to a P/E in the high 13s.

Remember, our S&P 500 is trading at a higher multiple than that now. Also, our economy isn’t

growing as fast and we have far higher unemployment and much more debt hanging over our heads. So, I believe this P/E projection is very, very reasonable.

In dollar terms, I believe the ETF has a maximum $10 temporary downside risk at worst, with a potential upside reward of at least $20 per share. That’s a favorable risk to reward to consider.

China Tends to Recover QuicklyWhen it comes to Chinese stocks,

it’s better to be a day early than even one day late. Why? The country tends to bounce back faster than we can sometimes comprehend from our Western perspective. In Chart 4, you can see the Chinese economy growing about 6 percent in 2002. A little more than one year later, the economy rocketed past 10 percent growth!

In 2009, the economy was back to the 6 percent growth level, but quickly doubled to 12 percent annually.

You can’t wait on China, like you might be able to with the United States. The Chinese economy tends to recover at a rapid clip, much more than we’re used to when dealing with the more mature economies of the world.

This time, I don’t believe China’s GDP growth will slip into the 6 percent range again, because we’re seeing signs of a turnaround already. Even if it does tick a little further down, we’re still getting in at a very good time, because when it starts its

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Watching the charts of FXI, a bullish trend is forming, which will only be bolstered by the solid fundamentals starting to emerge out of China. By acting now, we can be in before the masses start to sense the turnaround taking place.

SOURCE: BigCharts.com

iShares FTSE China 25 Index Fund, 2004-2012$706560555045403530252015

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rocket ride up, it will be with such speed that the best values will surely be gone before there’s enough time to react.

We can’t wait for the media or economists and analysts to tell us when things are turning around in China. If we start hearing that, we’ve waited too long. We need to enter when sentiment is horrible, fundamental valuations are cheap and technicals are demonstrating signs of a turnaround, all before the average investor is clueing in.

That’s why I’m recommending the iShares FTSE China 25 Index Fund (FXI) at or below $44 per share for the Commodities Portfolio.

A Company Everyone Else Is Still Too Scared to Own

So far, I’ve told you about chasing negative sentiment and the idea of buying when people are down on a stock. In this next pick, we certainly put that idea to the ultimate test.

That’s because the stock I have in our sights is none other than BP Amoco plc (NYSE: BP).

Yes, it’s that BP. The one that makes you think of oil gushing into the Gulf of Mexico, a very expensive cleanup effort, and compensation paid out to businesses impacted by the spill. We still see the TV advertisements from BP trying to promote tourism in the Gulf area as it still works to recover.

The whole disaster was monumentally expensive, no question. And it’s not over yet. You would think such a costly situation would have “done them in,” and indeed, it might have in the case of a smaller company.

In BP Amoco’s case, however, the Gulf spill didn’t push it into bankruptcy. In fact, in studying its balance sheet, I was shocked at how good it still looked, despite the negative media attention and huge bills as it cut checks to people and businesses on the Gulf coast.

I’m not saying it is finished paying these debts or that it won’t still have at least one more bump in the road. But I do think that most people don’t realize how big a company this is and what its prospects are going forward.

pick at a glance

positives• Underlying financial fundamentals for China point to a recovery not being recognized yet by investors at large; because of that, we can get growth potential on the cheap.• Based on my analysis, I think this ETF can reach the $60 level over the next 12 to 18 months, which equates to a P/E of a still very reasonable 13 to 14.

risks• Still an emerging market, China stocks tend toward volatility as compared to more established economies. So as an investor, you have to be willing to hold on during wild rides.• Although signs for 2013 are very encouraging for China, any setback in the global economy can have ramifications on the country’s economy.

ISHARES FTSE CHINA 25 INDEX FUND (FXI)sector: Chinese stocks

price: $41.00 (as of Jan. 9)

52-week range: $31.62-$41.97

p/e ratio: 9dividend yield: 2.36%

profile: This ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE China 25 Index. The fund generally invests at least 90 percent of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index.

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Economic recoveries in China tend to happen in a hurry. Twice in the past decade, GDP has ratcheted up from 6 percent growth to 10-plus percent in the span of one year. With China, when the pop comes, you can’t be dawdling on the sidelines as an investor.

SOURCE: Tradingeconomics.com | National Bureau of Statistics of China

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A Fundamentally Solid Company Despite the Gulf Oil Spill Issue

BP is a $130 billion company that made over $37 billion last year (EBITDA). Cash on its books — despite the many costs of the Deepwater Horizon spill — is still at a whopping $16.36 billion. So at this moment, in the midst of its worst days as a company, it is still on more financially sound footing than many companies are on their best days.

But the case gets better. Not only is BP huge, with plenty of earnings and lots of cash on hand, but it’s also selling for a bargain fundamentally. Its trailing P/E is 7.46 as of this writing, and the forward P/E is 8. That’s half of what the S&P 500 is trading for.

It’s not only inexpensive compared to the U.S. stock market as a whole, but it’s also cheap relative to its peers in the industry:

Company Forward P/E Exxon Mobil 10.76 Chevron 8.74 ENI 10.04

So why buy BP now? After a large negative event, such as the horrific oil spill in 2010, it’s prudent to sit on your hands as an investor. You want to see where the new lows are formed after the sell-off. Let’s take a look at BP’s weekly prices over the past 10 years in Chart 5.

Based on what I see in BP’s charts, investors already have given BP its lashings. Yes, there still could be more litigation, but I think the worst is behind the company — investors already have taken the stock down from around $80 per share to as low as $27.

I believe you can see the “point of maximum pessimism” from across the room in the volume along the bottom of the chart. The selling volume was enormous. In fact, it was so big that I believe that all of the shareholders that were going to sell in reaction to the spill and its aftermath already have done so.

On the chart, I’ve included Elliott Wave numbers and letters. Note that the point of maximum pessimism came at the end of the “A-B-C” three-wave correction lower. These three-wave corrections mark the end of one trend and the beginning of the next by the time it gets to the end of Wave C.

Then, according to Elliott Wave theory, it begins its next five-wave uptrend known as a 1-2-3-4-5 move. The first bounce higher already has happened, that was Wave 1. Then the first pullback within the new uptrend happened, which was Wave 2.

The bottom of Wave 2 is just above $35 per share. So that should set the new floor for BP’s stock price. With that in mind, as of this writing, BP could have a potential downside of around $6 per share from here. However, I believe it is fully capable of heading to the $65 area over the next 12 to 18 months. Why?

For starters, the next wave that will begin soon is a “Wave 3,” which tends to be the longest and strongest of all of the waves. Now, it’s possible though that Wave 2 has not completed, and thus it still dilly-dallies around in a symmetrical triangle pattern. But either way, the $35 lows should still hold. And while we wait, we’ll reap a huge 5.20 percent dividend yield while we wait for eventual appreciation.

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BP Amoco 10-Year Price Chart$807570656055504540353025

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Looking at BP’s chart with the Elliott Wave in mind, we can see BP should form its first uptrend in more than five years in 2013. I want to be in the stock before that happens, and prices are low.

SOURCE: BigCharts.com

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The stock has not trended higher in more than five years, and it is clear that the lows have been put in place by the massive selling crescendo on the chart. With sentiment on BP remaining negative, yet the point of maximum pessimism well past and the fundamentals being such a solid value and the dividend yield being so high, I believe we’re now at a good point to buy. I think the stock can hold these levels and head higher as Wave 3 is eventually unleashed in 2013.

We’re still in a moment where no one seems to want BP stock, with memories of the spill still etched firmly in mind. But by buying BP now with such a low P/E and such a high dividend yield, we’re taking what’s a smart risk in my opinion, especially since I see as much as a 50 percent gain

over the next 18 months. My recommendation is to buy BP Amoco plc (BP) at or below $48 per share for the Commodities Portfolio.

Your Next Question: Why Are We Invested in So Many Oil Companies?

BP Amoco joins a host of other oil plays in our portfolio, including Petrobras, Devon Energy, and Total S.A. There’s a reason why I’m capitalizing on oil companies that are trading at cheap fundamental multiples — I believe oil is a no-brainer investment these days. There are many reasons why, but I want to focus on the two that make the math of oil investing work in our favor:

1. The world’s population growth will place an even greater demand on finite supplies of oil.

2. The “break-even” price for oil keeps rising. Here’s more on each point.Back in 1804, the world’s population reached

one billion people. Then, 123 years later in 1927, it reached two billion. But just 33 years later in 1960, it hit three billion. The four billion mark was reached 15 years later in 1975. The five billion mark was reached 12 years later in 1987. The six billion mark was reached 12 years after that in 1999. The seven billion mark was reached 12 years later in 2011.

It used to take between 33 and 123 years for another one billion people to show up on the globe. Now it only takes 12 years. When you have another billion people populating the planet every 12 years, it does not take much to push up the price of a finite resource such as oil. People will need transportation, after all, whether it’s bus or car or other fossil-fuel-powered options.

I know we hear reports about how the world is awash in oil these days. But those discussions are drastically underestimating the future demand for oil. By the year 2050, we’re set to hit the 10 billion mark in global population. Such math is strongly in the favor of higher oil prices over time.

It’s not only demand that will drive prices. Middle East oil producers also are a huge determining factor. And they need higher prices over time to sustain their production.

Let me explain. In the Middle East, they do

pick at a glance

positives• It’s a strange positive, but this stock has taken an absolute beating after the Gulf oil disaster. While a drop in price made sense based on the immense costs of cleanup (with the final tally unknown at that point), the market overreacted, leaving a great value in its wake.• Oil fundamentals and population growth support rising oil prices over time; investing in oil companies plays on these undeniable long-term inclinations.

risks• There are likely still bumps in the road in the aftermath of the Gulf oil spill, and those costs will still hit the bottom line at some point.• Oil prices in the long term are almost certainly headed up, but in the short term, there will be all sorts of ups and downs to contend with. When investing in oil, you need to be ready to ride some volatility as the larger trends unfold.

BP AMOCO PLC (BP)industry: Oil

price: $44.27 (as of Jan. 9)

52-week range: $36.25-$48.34

p/e ratio: 7.97

dividend yield: 4.85%

profile: BP plc engages in oil and natural gas exploration, field development, and production; midstream transportation, and storage and processing; and marketing and trading of natural gas, including liquefied natural gas (LNG), and power and natural gas liquids (NGL).


not determine their breakeven costs for oil based on what it costs to pull it out of the ground. Instead, they base their costs upon their budgets. The bigger their governmental budgets, the more money they need to get per barrel of oil, since that is their main source of revenue.

As you know, there have been riots and uprisings in the Mideast in the past couple of years, over rising food cost and serious quality-of-life issues. Government costs are rising in response, which is how the dictators intend to remain in power. But the trend is not their friend.

Back in 2006, the average break-even price for Middle Eastern governmental budgets required oil at $33.60 per barrel. Just six years later in 2012, they need a break-even price of $79.80 on average. Going forward, the Institute for International Finance believes that this break-even price will have no problems reaching $110 a barrel or more.

So oil trading in the $80s and low $90s these days is near the current floor for oil prices, in my view. Yet, it has a lot of pressure to move up higher, especially as these break-even prices rise over time. The power of OPEC may sometimes be questioned, but it is not going to allow oil to trade under those break-even prices for any length of time. You can count on that.

We’re Prepared Now for Higher Oil Prices to Come

While higher oil prices won’t be good for the average consumer, it will be a good thing for oil companies. They have somewhat of a fixed cost to pull oil out of the ground, but as the market price for oil heads higher, the price they can get for their oil rises too, which widens their profit margins. Those increases in price are sustainable, as well.

Why? Think of yourself, for instance. One of the last things you’ll quit doing is filling up your car with gas because the price is too high. You will cut out Starbucks coffees, going to the movies and going out to eat, among other things, before you’ll make it to where you can’t afford to get to work because

of gas prices.Oh sure, in the near term there can be “demand

destruction” as prices get too high. But you’ll notice that the new floor for oil gets higher all the time. That’s not going to change, no matter what you hear the news media saying.

For further proof, let’s look at the price of West Texas Intermediate crude oil over the past 24 years in Chart 6. From the 1980s through 2004, oil traded roughly $15 to $38 a barrel.

However, oil broke out of this range in 2004 and hasn’t looked back. Now it appears that $40 is the floor temporarily after massive global collapses, but even the recession of 2008 and 2009 didn’t take it under that level for any length of time.

On the other hand, if the global economy is growing, the price zips back up to $80-plus like nothing flat! That’s not magical. It’s because that’s where we find the break-even prices for Mideast oil, and because every 12 years, another billion people populate the planet.

Notice two things in the chart: 1. The new, steep trajectory of oil has lasted for

eight years and shows no signs of stopping. 2. Notice the increased volatility in the price of

oil these days too. It makes the cost of energy harder to gauge for many companies and consumers.

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WTI Crude, 1988-2012$1701601501401301201101009080706050403020100

Oil’s price trajectory has changed dramatically since 2004, as this chart clearly shows. It’s hard to imagine going back to the range-bound pricing that marked oil in the decades before that powerful shift upward.

SOURCE: Barchart.com

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Again, that is not good for most people or companies, but it’s not a bad thing for oil companies. That makes them a great place to be for investors, and is why I don’t mind our exposure to these great companies, especially while they are still so inexpensive.

Portfolio ReviewPetrobras (PBR)

From the middle of 2008 onward, Petrobras, a former stock market darling, could do no right. It’s what has kept the masses away from it, even when valuations dropped to such reasonable and value-oriented levels. Since we bought the stock in May, it has been volatile, no doubt. It reached lows in the $17’s, and was up to almost $25 at one point before going back down into the $19’s.

Despite that, there’s no reason to panic. We have to be patient with Petrobras, because the starting point of the “big payoff” on this investment will be with the next move higher. It should be a biggie. I believe the next major advance of the stock could take it up to the $27 to $33 per share neighborhood. It should be able to do this over the next 12 months. Even if it hits the lower end of what I expect, that would be a 41 percent return. So, you can see why it’s well worth the wait.

Remember that this stock trades at only three-fourths of its book value. So it’s dirt cheap. And with almost $26 billion of cash on its books, it’s more than able to take care of itself as it turns around in the coming months.

ArcelorMittal (MT)Our steel stock, ArcelorMittal (MT), was

recommended in the early summer, at a time when steel was akin to a cuss word on Wall Street. Everyone was convinced that China’s slowdown was going to continue, and that it would take steel down with it. ArcelorMittal bottomed in early June — we bought it about a buck and a quarter off its 52-week low, which wasn’t a bad entry point at all.

Ever since, MT has been making a series of higher lows and higher highs. And once MT clears $17.50 on a closing basis, it is going to be off to the races. I believe this could happen for us within the next few months. Why?

China’s manufacturing data has turned positive for two consecutive months now. Its industrial production data has come out favorably as well. Not only this, but the Chinese government is stimulating their economy and it looks like they are of the mind to continue that.

As I’ve said in this issue, I first was tipped off to the turnaround in China by the stabilization of commodities such as copper, steel and the CRB Commodity Index. I felt that it would be unlikely that these commodities were halting their declines without some improvement in China’s economy.

I anticipate one more pullback for MT, and then the next major push higher takes out the former resistance around the $17.50 mark. At that point, investing trend followers will start boarding, as it will be more obvious that steel stocks are turning around. Those folks will be picking up the stock in the $18 and $19 range, while we got it at $14.26 per share. And remember, this stock pays us a dividend greater than 5 percent. In fact, we’ve already received two of our dividend payments so far. We’re going to do very well on this stock from an appreciation and dividend standpoint.

iPath DJ/UBS Cocoa Total Return ETN (NIB) The Cocoa Total Return ETN is experiencing

its first major pullback since finding a bottom in the January to May period of last year. I believe those lows in the $27-$28 area were the “real lows” for cocoa, and that we will see those lows hold.

We are toward the latter stages of a three-wave pullback. We should see the completion of this pullback soon and its next bounce higher after that. I believe that over the next 12 or so months, we’ll have a decent return on this pick, most likely to the tune of 20 percent. That won’t likely put it among our best returners, but still should be an above average return for this market. In my view, taking some singles and doubles with our home runs is not a bad outcome at all.

Devon Energy (DVN)In this issue, I mentioned Devon among the oil

plays we’re currently in or watching. In my chart analysis, this stock likely will bottom in early 2013 for us, and then begin its ascent higher.

RECOMMENDATION TickerEntry Date

Entry Price

Recent Price

Dividend Yield

Div. Paid Since Entry

Total Return

Buy at orUnder

RECOMMENDATION TickerEntry Date

Entry Price

Recent Price

Dividend Yield

Div. Paid Since Entry

Total Return

Buy at orUnder


In hindsight, we bought this one a bit early. But we got it in the latter stages of its decline, so we’re still in a good position, especially since I expect it to go into the $60’s to $70’s within the next 12 to 18 months. Once this particular stock heads upward, it tends to make up a lot of ground rather quickly.

Just a quick refresher of what I like about this stock. It has a forward P/E in the 12’s, which is reasonable. It is trading slightly under its book value. It made over $5 billion EBITDA last year and it has got well over $7 billion of cash on its books. Therefore, we definitely bought a great company. It’s solid. It just needs a bit more time to turn around. I am still confident, even though this one is our biggest loser at the moment, percentage-wise. I believe that is a temporary situation.

Peabody Energy (BTU) Peabody is just over break-even right now

in our portfolio. I think it could pull back a bit further in the first month or two of this year before making its next real advance higher. We still are in the turnaround/basing phase for BTU. But once it gets going decisively higher, it’s like a rocket. Let me give you two examples of its last two run-ups.

In 2009, the stock went from just over $15 per share to around $53 per share in one year. Its next major advance in 2010-2011 raised it from around $35 to $74 per share. So this stock can really make some tracks once it locks into a new uptrend.

I know this may sound crazy since BTU is in the $25’s as of this writing, but within two years, this stock could very well see $65 per share.

COMMODITIES PORTFOLIO

Encana ECA 20-Apr-12 $18.39 $19.62 4.35% $0.60 10.27% $20.00 Petrobras PBR 30-May-12 $19.12 $19.65 2.93% $0.00 2.77% $23.00 ArcelorMittal MT 26-Jun-12 $14.26 $16.83 5.27% $0.19 19.59% $16.00 iPath DJ-UBS Cocoa NIB 24-Aug-12 $32.55 $30.29 0.00% $0.00 -6.94% $34.00 Devon Energy DVN 27-Sep-12 $59.31 $53.35 1.35% $0.20 -9.68% $65.00 Vale S.A. VALE 27-Sep-12 $18.22 $20.41 6.47% $0.59 15.72% $22.00 Teck Resources TCK 24-Oct-12 $31.34 $37.31 2.67% $0.45 20.75% $33.00 Peabody Energy BTU 7-Nov-12 $26.00 $26.26 1.31% $0.00 1.00% $26.00 Barrick Gold ABX 27-Nov-12 $35.13 $33.61 2.28% $0.20 -3.78% $43.00 Cia Energ de Minas Gerais CIG 27-Nov-12 $12.10 $10.63 22.03% $1.86 3.75% $15.00 Total SA TOT 20-Dec-12 $51.90 $51.55 5.73% $0.00 -0.67% $54.00

* Denotes recommendation not yet purchased As of close January 9, 2013

CURRENCY PORTFOLIO

* Notes on all portfolios: “The “Total Return” column includes all reinvested dividends at concurrent recommended buy prices. Returns calculated based on a purchase of $1,000 of the security on the listed entry date and price. The “Dividend Yield” column reflects the yield investors receive assuming they bought at the entry price and followed all subsequent recommendations.

As of close January 9, 2013

iShares MSCI Italy Index EWI 24-Jul-12 $9.33 $13.80 3.40% $0.06 48.80% $14.00 WisdomTree India Earnings EPI 27-Nov-12 $18.00 $19.73 0.90% $0.02 9.73% $21.00 NTT DOCOMO DCM 20-Dec-12 $14.56 $14.43 0.00% $0.00 -0.89% $15.50


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Closing ThoughtsEach of the stocks in our portfolio possesses its own strengths.

Some of them have lower price-to-earnings ratios than others. Some have higher dividend yields. Also, the companies are spread out to various parts of the globe. Even when we focus in a particular commodity, such as oil, I make sure we have some diversification among them, since you can never predict when a major negative event might strike one of them, such as what happened to this month’s pick BP Amoco, in 2010.

In these ways, our portfolio is about managing risk. On the front end, when we buy, we buy at a level that’s defensive, getting cash-rich companies at very low P/E’s and price-to-book ratios.

When it comes to commodity and currency investing, we can never take away all risks. But we can mitigate them by buying things at historically cheap levels. It does not mean it is impossible for them to fall further. It just means that the fall would be manageable, and the stock most likely would end up recovering above our buy price because we bought it right.

I think back again to BP. At the time of the Deepwater Horizon disaster, the company’s P/E was almost 12. This year, we are getting it under 8, with fundamentals that back a higher price. By not overpaying for an asset, having patience to let trajectories play out, and the wisdom to collect dividends along the way, we are building a portfolio that can withstand world shocks and generate returns in good times and bad. It’s the strategy we will continue, and I’m glad you’re all along for the ride.

Actions to Take NowAction No. 1: Watch for an opportunity to add the iShares FTSE

China 25 Index Fund (FXI) to the Commodities Portfolio at or below $44 per share.

Action No. 2: Buy BP Amoco plc (BP) at or below $48 per share for the Commodities Portfolio.

God bless!

Sean Hyman

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DISCLAIMER: This publication is intended solely for informational purposes and as a source of data and other information for you to evaluate in making investment decisions. We suggest that you consult with your financial adviser or other financial professional before making any investment. The information in this publication is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy, sell, or trade in any commodities, securities, or other financial instruments discussed. Information is obtained from public sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. In no event should the content of this letter be construed as an express or implied promise, guarantee or implication by or from Ultimate Wealth Report, or any of its officers, directors, employees, affiliates, or other agents that you will profit or that losses can or will be limited in any manner whatsoever. Some recommended trades may (and probably will) involve commodities, securities, or other instruments held by our officers, affiliates, editors, writers, or employees, and investment decisions by such persons may be inconsistent with or even contradictory to the discussion or recommendation in Ultimate Wealth Report. (Current holdings of the Senior Financial Editor include Barrick Gold (ABX), Vale S.A. (VALE), ArcelorMittal (MT), and Petrobras (PBR).) Past results are no indication of future performance. All investments are subject to risk, including the possibility of the complete loss of any money invested. You should consider such risks prior to making any investment decisions. Copyright © 2013 Ultimate Wealth Report.

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